LOUISE FAIRSAVE: Credit card risks
Credit cards were originally designed to be a convenient way to spend money without carrying it around in cash. In more modern times, they are being used mostly to borrow money in order to fund purchases without necessarily having those funds available for prompt repayment.
Your credit card allows you to make purchases and repay the related loan over a period – which could be over a number of years by just making the minimum payment indicated on the monthly bill.
Credit card holders are always concerned about the unauthorized use of their cards if they are lost or stolen. In this digital age, there is the additional exposure to online fraud as was the case with the recent Target data breach. Millions of shoppers’ credit card account information was stolen by
hackers. It is also understood that fraudulent persons do not even have to access your card information online; they may use electronic scanning devices to gather information right out of your closed purse which is resting comfortably on your shoulder.
The use of a credit card can be very beneficial when used in a disciplined and financially wise way. However, this article outlines seven areas of risks with credit cards in order to further guide your wise use:
1. Credit cards typically charge a high interest rate on outstanding purchases. Interest will be charged every month on any balance not paid by that deadline, with interest being accrued from the time of the original date of the unpaid purchase. This interest charge can be completely avoided by settling the credit card bill in full within the payment deadline each time the bill arrives.
2. The credit card issuer also charges fees for late payments, for exceeding the limit on the card, for transferring the balance from one card to another and for cash advances. Any indiscipline like this forms additional ways for the card issuer to earn income.
For one card issuer, the income from fees alone in 2012 was over US$35 million.
3. Credit card issuers have been shortening the grace period in which to pay your bill in full, leading to an earlier start of interest and fees for undisciplined users, or users who cannot afford or forget to make the payment.
4. Bad behaviour like persistent late payments and exceeding the card limit can damage your credit rating. Do think of this implication when using your credit card.
5. There is the risk of overspending or overestimating what you can afford. This is because a credit card allows you entirely cashless purchasing with the expectation that you will pay later. Some people are disposed to creating drowning debt with such a licence to spend.
6. If the card is lost or stolen and the cardholder takes some time to report it, the cardholder may still be responsible for any purchases made before that report. Also, if the cardholder gives or lends the card to another person, the cardholder remains entirely liable for all purchases that person may make.
7. Fraud and identity theft are the most frightening risks as they could destroy you financially. Online purchasing on unsecure websites opens the cardholder to hackers stealing the account data and then using it to make their own purchases. Yet, also beware of hackers reaching even the secure websites; they work to access all sites. One way to limit this exposure is to hold a separate credit card for shopping online with a very low credit limit.
• Louise Fairsave is a personal financial management advisor, providing practical advice on money and estate matters. Her advice is general in nature; readers should seek advice about their specific circumstances.